Back in January on T.S.E.G Podcast (Link posted below) I discussed the new “No Tax on Tips” provision and explained that it appeared primarily aimed at traditional W-2 employees.
Since then, the IRS has issued additional guidance.
Here’s the clarification:
The deduction is not strictly limited to W-2 employees. Self-employed individuals may also qualify — but only if the tips are properly reported and meet IRS requirements.
What has not changed:
• Tips must be reported on a W-2, 1099, or properly included in income
• Automatic gratuities/service charges do not qualify
• The deduction is capped at $25,000
• Income phase-outs apply
• Tips tied to illegal activity, prostitution services, or pornographic activity do not qualify
Now let’s address the big question I’m getting:
“Can I just use Form 4137 if my tips weren’t reported?”
No.
Form 4137 is designed for W-2 employees who received tips but failed to report them to their employer during the year. It calculates the employee’s share of Social Security and Medicare tax on those unreported tips.
It does not:
• Convert self-employment income into wage income
• Create eligibility for the tip deduction
• Retroactively legitimize unreported cash tips
In fact, filing Form 4137 increases payroll tax — it doesn’t reduce it.
TLDR:
If the tip income is not properly reported on the required forms, it does not qualify for the deduction.
We will continue monitoring IRS guidance as it develops and keep you updated on any changes.
If you’re unsure how your tips were reported or whether you qualify, please reach out — we’re here to help.
